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bokov comments on US default as a risk to mitigate - Less Wrong Discussion
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This rings true, but I instinctively play devil's advocate. You are essentially saying that the overall behavior of the market is driven by the decisions of a few insiders. The complementary scenario is that the market generally responds to widely available information, and that even though insiders can exploit this, there are not enough of them to actually drive the market. What observable features would you expect in a insider-dominated market versus an approximately-rational (boundedly-rational?) market?
Okay, some (anecdotal) evidence now in and it looks to be in support of... both models?
The insider-driven model you propose would predict that there would be a negligible reaction of the market to announcements of a deal trickling in this morning because the insiders would already know how it would go and would have traded accordingly. The non-insider-driven model would predict a rally after the deal was announced.
What we are seeing is W5000 (Wilshire 5000 index) closing last night at 18141, opening today at 18254, and rallying at just before 10am, when the first hints of the impending deal got on the news, to 18322 and staying roughly steady after that. S&P and NASDAQ behave similarly. So from last nights close to when this morning's rally tapered off it gained 181 points. Of them, 113 were gained in after-hours trading, presumably by insiders. The other 68 were gained in trading during the 10 minutes after the news first broke. So, if we do a naive estimate, 68/181 = 38% of the movement it attributable to traders with access to the same information you and I have. So if I'm interpreting this correctly, and if this one datapoint is a representative one (two huge ifs) then insiders do drive stock prices, but the influence of non-insiders is not negligible. That in turn implies that it is not hopeless to turn a profit trading ETFs.
Again, all this is on one datapoint and should not be taken at all seriously, but this might be a framework for how to actually test the insider theory on a larger dataset.
Also, this may imply that the insiders (at least the ones whose actions are observable in this time interval) did not have more than about 18 or so hours notice.
If there is an even earlier group of insiders, the data (try zooming out) might be consistent with one or more of the following from there not being sharp rallies earlier:
There are too few of them to stand out over the noise of the non-insiders
They did not get their insider information at the same time and no individual one of them was large or greedy enough to trigger a rally.
They had automated orders that would be triggered only under certain conditions.
I thought of one.
An insider-driven market anticipates legislation with major economic implications. A non-insider-driven market reacts to legislation with major economic implications. So if we see how the market acted during previous hotly contested congressional decisions, we should be able to infer if and to what extent it is insider-driven, and maybe even get some clues about what sectors most insiders are in, and what branches of government are feeding them information.
I think Goldman Sachs has both a lot of financial capital and good beltway inside information. The same goes for the other big banks.